5 minute read | May.22.2023
In a recent M&A decision following trial, the Delaware Chancery Court held the former CEO of a public company personally liable for breaches of fiduciary duty in a sale of the company (In Re Mindbody, Inc. Stockholder Litigation (Del. Ch. March 15, 2023)). The court found that:
Delaware law allows an unconflicted CEO wide latitude to lead an exploration of the sale of a company provided that the board of directors or a committee of the board supervises the process and that steps in the process fall within a range of reasonableness. In Mindbody, the court found that the sale process did not meet these standards due to the CEO’s “disabling conflicts[s]” and extreme favoritism for the acquirer PE firm.
The facts in Mindbody are a tutorial on how not to sell a public company. Although the particular facts in Mindbody are unique, the underlying dynamics and pressures can arise in almost any significant M&A transaction. Among the “bad” facts recited by the court, the CEO:
As a result of the CEO’s conduct, the court said the company board and the transaction committee utterly failed to effectively oversee the sale process.
The court also said that the M&A financial advisor retained by the transaction committee tipped the acquirer PE firm as to the CEO’s target purchase price for the company. In addition, the stockholder vote was not fully informed—for one thing, the merger proxy statement did not mention several material facts, including a number of pre-sale process meetings and communications between the CEO and the acquirer PE firm and positive 4th quarter financial results.
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If you have any questions regarding the Mindbody case, please contact one of the listed authors or your regular Orrick contact.